Capital Intelligence (CI), the international credit rating agency, announced that it has maintained the Financial Strength Rating of the UAE’s National Bank of Umm Al Qaiwain (NBQ) at ‘BBB’, reflecting the Bank’s very strong capital adequacy ratio (CAR) and consistently good profitability and liquidity. Weak asset quality is a major constraining factor, along with customer concentrations in loans and deposits, the small balance sheet size and the continuing high credit risks in an otherwise improving operating environment. NBQ’s Foreign Currency Ratings are affirmed at ‘BBB+’ Long-Term and ‘A2’ Short-Term. The Bank’s access to federal government support underpins its Foreign Currency Ratings. The Support Rating is maintained at ‘2’ denoting a very high likelihood of official support in case of need. In view of the continuing strong capital adequacy, liquidity and profitability in the first half of 2014, a ‘Stable’ Outlook is appended to all the ratings.

NBQ’s asset quality ratios had weakened soon after the 2008 global financial crisis and the sharp fall in real estate and rental prices in the country. Non-performing loans (NPLs) had peaked at end 2012, but declined in 2013. However, the NPL ratio remained high. The Bank’s loan-loss reserve (LLR) coverage ratio, which had fallen steeply from a pre-2009 full coverage level, improved in 2013 ? but remains low. NBQ’s large capital base provides a good buffer and its effective NPL coverage ratio is fairly high. Moreover, impaired loans have a high collateral cover.

NBQ’s CAR has been at a very solid level post 2008; this was partly because of low risk asset growth between 2009 and 2011, during which time both net loans and contingent account balances had contracted. Despite good net profits, the increase in capital has been fairly modest in recent years due to high dividend payouts. NBQ’s Tier 1 ratio is also very high and its capital to total assets ratio is the highest among its peers. The Bank’s capital is sufficient to support a fairly sizeable increase in risk assets.

The Bank also has strong liquidity ratios. Customer deposits and capital continue to be the primary sources of funding; short-term interbank liabilities are negligible, there are no medium/long-term debts on the balance sheet and liquid assets are high. Customer deposits have a sizeable medium-term component as a result of which asset/liability mismatches are very low.

NBQ’s operating profitability ratios remain strong overall and are underpinned by the Bank’s wide net interest margin (NIM) and good control over operating costs. Both net profit and operating profit recorded strong growth in 2013 over the previous year, but that was mainly due to a large increase in investment income, which partly offset higher provisioning expenses and lower net interest income. Both return on average assets (ROAA) and the operating profitability ratio were higher than the peer group average in 2013. These key ratios continued to be strong in H1 2014, although operating profit recorded a decline over H1 2013 on account of reduced investment income, and net profit recorded only marginal growth. A positive development in the first half of 2014 was the moderately good increase in net interest income on the back of higher loan volumes following several consecutive years of declines.

NBQ, with total assets of nearly AED12.5 billion at end-June 2014, is one of UAE’s smaller commercial banks. It is primarily a corporate banking institution and its client base consists mainly of small and medium-enterprises operating in the real estate, construction, trade and services sectors. The Bank also has a moderate sized retail banking base and it offers the full suite of products for this segment. The Bank is owned 30% by the government of Umm al Qaiwain.

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